Are markets ready for Trump 2.0?

NOV 5, 2024, is an important date for global markets due to the US presidential election. The outcome could significantly influence how the markets will react and behave, both immediately and in the short- and long-term.

Key to this outcome are the election promises dished out by the candidates especially those related to spending and taxes.

If implemented, these measures will have an impact on markets, especially with respect to inflation expectations, global trade, interest-rate movements and whether the US dollar will continue to remain strong or otherwise.

Harris goes for revenue boost

Vice-president Kamala Harris’s campaign is driven by boosting the government’s revenue and providing tax breaks for those who need them the most.

Her proposals include a tax increase on wealthy Americans to fund child tax credit, along with tax breaks for first-time homebuyers and people starting small businesses. Additionally, her plan aims to support affordable housing and other initiatives.

According to the Committee for a Responsible Federal Budget’s (CRFB) estimates, Harris’ plan will add approximately US$3.5 trillion to the federal debt over the next decade. This is despite raising the corporate tax rate from 21% to 28%.

The US$3.5 trillion estimate is only the central estimate and could go as high as US$8.1 trillion depending on how her plans are carried out.

Harris also plans to impose a tax on unrealised gains for assets held by those with net worth in excess of US$100mil.

Her proposal will treat the increase in the value of assets on real estate, stocks and private businesses as taxable income each year.

She also plans to increase Medicare taxes, reform international tax rules, and reduce prescription drug costs.

Harris has consistently said that both she and the current US president want to make the “wealthiest Americans pay their fair share”. They have suggested that a minimum tax rate of 25% be imposed on wealthy individuals defined as those with net worth of more than US$100mil.

Trumping on tax cuts

Former president Donald Trump’s campaign promises are even more damaging to the US deficit levels as they are mainly aimed at reducing taxpayers’ burden and Making America Great Again.

Trump’s plan, based on the CRFB’s projections, has a central impact on the country’s fiscal debt position by US$7.5 trillion and rising to as high as US$15.2 trillion. His tax plan, among others, include expanding and modifying the Tax Cut & Jobs Act, exempting tip and overtime income from taxes, and lowering the corporate tax rate for domestic manufacturers to 15%.

Just like in the previous election, Trump also intends to raise tariffs, reverse current energy/environmental policies and expand production.

What does it mean for America?

The national debt, which currently stands at 99% of gross domestic product (GDP), is expected to grow from 102% at the start of 2026 to 125% by the end of 2035 based on the Congressional Budget Office’s (CBO) current baseline.

Growth in debt will continue to outpace the economic growth projection under both candidates’ plans. According to the CBO’s central estimates, Harris’ proposal will see debt rising to 133% of GDP in 2035, while Trump’s plan would push debt to 142% of GDP by then.

Clearly, both candidates’ proposals will only worsen the US fiscal position, leading to increased deficits and more debts in the years to come.

No austerity measures

Both US presidential candidates are using the election platform to win over voters without any clear plan to reduce the fiscal deficit or debt. What does this mean for capital markets, trade and international relationships?

For the sovereign debt market, the United States will likely accelerate the pace of borrowings by increasing the size of new US Treasuries sold in the market.

The two candidates’ proposals also rely heavily on tax strategies to win over voters.

In the case of Harris’ plan, the proposed increase in corporate tax rate and taxes on unrealised gains (although meant only for the rich) are seen as unfriendly to the market as this would reduce corporate profits going forward.

This could impact the earnings growth of most companies, leading to perceptions that the market is overvalued.

Under Trump’s proposal, businesses would be happy to see lower taxes but the idea of new tariffs or higher tariffs would eat into consumption as the cost of goods entering American soil will increase significantly.

This could see inflation prints being sustained for a prolonged period and will remove any bets that the US Federal Reserve (Fed) will continue to cut rates beyond what is currently expected for the next one to two quarters.

This would also suggest that the US Dollar Index, which is still up year-to-date by about 2.1%, will likely resume its uptrend.

Trump’s proposal would also mean that international trade will be further strained, especially with China, as well as Chinese-owned companies that are exporting from countries outside China to the United States.

Other exporting nations with products destined for the United States too may not be spared as Trump is known to be pro-American and pro-business, and will not hesitate to take drastic actions.Lose-lose for markets?

Given the above scenario, the Nov 5 presidential election seems unfavourable for capital markets, and neither are the proposals by both candidates positive for the economy as a whole.

However, as in any election, the proposals are mere proposals for now and we are rather unsure if these are merely to win voters or if will they be implemented in the first place. Capitol Hill will be in a tough spot to approve much of what is being proposed by both Trump and Harris, and in all likelihood these proposals may remain unrealised.

Nevertheless, as we are less than three weeks away from polling day and the pendulum can shift easily between the two candidates, campaign promises may intensify.

For instance, Trump recently announced plans to allow tax deductions on interest paid for car loans, renegotiate trade deals, and implement tariffs targeted at auto imports.

While Trump always believes that his plans are the best of economic plans, it is frightening to see that the reality may be very different especially if causes domestic inflationary pressure to increase due to higher cost of goods, which in turn will see interest rates rise.

Surely unorthodox policy measures can backfire as we have seen in countries like Türkiye as explained in last week’s column.

Politicians should not dictate how economic policies are carried out as they could have a disastrous impact on the domestic economy and the world over, especially if involves the two biggest superpowers, the United States and China.

The passing comments made by Trump this week that he would seek greater influence on the Fed itself is already a red flag for markets.

After all, Trump himself believes that the dollar is overvalued. There is a strong likelihood that he may interfere in the direction of the US interest-rate policies, pushing for lower rates despite likely higher inflation, should he be elected as the 47th US president.

Given that it is too close to call as to who will be the next US president, one thing is rather certain: the victory of either candidate will likely dampen the capital markets. However, in terms of impact, a Trump 2.0 presidency may likely be much more damaging than a Harris win.

The question is whether markets are ready for another four years of Trump and his policies, or whether they are playing a waiting game to see whether his economic, trade and budget plans will be implemented or otherwise.